Interchange Fee (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Tuesday 15th January 2019 Grand Committee

This is badly done. If we had the opportunity to amend it, I would suggest that we did. On most of the things done by the Treasury, the jump has been made the right way. I regret to say that, on this, the jump has been made the wrong way. The asymmetrical approach would have been much fairer to the consumer.

[Lord Tunnicliffe (Lab)]

My Lords, last night, the House expressly rejected no deal in its vote. That is also Labour Party policy. These orders should not be necessary, but when the Government put instruments in front of us, our role is to ensure effective scrutiny of all SIs and to expose any serious concerns. We believe that this is consistent with our role as a revising and scrutinising Chamber. Having said that, and having listened to the splendid seminar on credit cards by the noble Baroness, Lady Bowles, which leaves me better informed, if not necessarily wiser, I have very few comments to make on this particular SI.

I start by expressing my sheer irritation with the failure to provide timely impact assessments. It seems utterly absurd. Paragraph 12.5 of the Explanatory Memorandum states:

“A full Impact Assessment will be published alongside the Explanatory Memorandum on the legislation .gov.uk website, when an opinion from the Regulatory Policy Committee has been received”.


That might have been snuck out in the past two or three days, but there is no reason to have an impact assessment if it arrives only after all the legislative procedures have been completed. We should have a thorough explanation from the Treasury as to why that is happening.

Once again, having said that, the Treasury produced guidance on these SIs—at paragraphs 7.1 to 7.9, I think—which are, word for word, the same in all Treasury no-deal Explanatory Memorandums. Therefore, I have had to read them in increasing detail. My favourite sentence is at paragraph 7.4:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. The scope of the power is drafted to reflect this purpose”.


As an amateur in this field, all I can do is try to test the SIs against that promise. It seems to me that the test is whether they are necessary and whether they obeyed the constraints of new policy. An interesting new area has been introduced by the noble Baroness: was there a better solution that still stopped within the test? I am persuaded that they are necessary; indeed, the Economic Secretary to the Treasury, as is required, signed a statement to that effect. I suppose that if they were left unmade, the credit card companies could rip the public off even more than where we are. I do not think that they introduce new policy, but the theme that runs through many of these SIs concerns symmetry and asymmetry. The noble Baroness has suggested that a better solution for the UK customer would have been an asymmetric solution. I will be very interested in the Minister’s response to that.

I note that the order comes into force on exit day. What I really want to know is how will the order be repealed if there is a deal. Can the Minister assure us that it is a genuine no-deal-scenario instrument and that it will be removed from the statute book if there is a deal? That seems the fundamental proof that it is a no-deal instrument.

My only other comment is that, because a no-deal solution is such a dreadful idea, virtually all these statutes create a situation in which the consumer is less well off; this is no different. As has been pointed out, consumers in the UK trading with a UK bank and suppliers will continue to enjoy protection, but there will be no protection overseas. I find it very sad that the Government believe that the chances of that happening are sufficient to require these SIs. I hope that we do not go down this road, because each of these little increments of loss of protection, particularly for consumers, is highly undesirable.

[Lord Bates]

My Lords, I thank the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, for their scrutiny of these SIs and I shall seek to address the points they made. First, in relation to the noble Lord’s point on the impact assessment, in line with the better regulation guidance the Treasury considers that the net impact on a business will be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the Payment Systems Regulator. Firms will benefit from the reduction in uncertainty under a no-deal scenario. Without this instrument the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.

[Lord Tunnicliffe]

Is the Minister therefore offering a different reason for there being no impact statement from the one given in the Explanatory Memorandum? It seems that a different reason has been put forward.

[Lord Bates]

I will come to that point in a minute. There is a group of impact assessments before the Regulatory Reform Committee, the body within BEIS that reviews these. It is currently considering them and will publish an impact assessment on a wider group of SIs, including this one. If that is not the case, I shall certainly come back to the noble Lord. However, that is why it sounds as though there are two answers when in fact there is one.

Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Tuesday 15th January 2019 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

Once again, I thank the noble Lord, Lord Bates, for his explanations. I declare my interest as a director of the London Stock Exchange PLC as some of these provisions could cover funds that might list on the exchange, although nothing I say is to do with the London Stock Exchange.

The AIFMD was a controversial piece of legislation. It was improved greatly during its long passage through the European Parliament and through trilaogues with the Council and the Commission—I think it took us more than 20 trilaogue meetings, which is a large number. I used up every ounce of my patience and innovation to keep it going until everything was in an acceptable place.

The directive started life as a way of regulating hedge funds, which were in the firing line after the financial crisis for their perceived role in the eurozone sovereign debt crisis and for selling unsuitable investments to retail investors—particularly in France which, unlike the UK, did not have any retail consumer protections in place. It was expanded to cover asset stripping. There are anecdotes around why that happened but I will not go into them here—and as I have not written my memoirs, noble Lords will not get to know them. Some hedge fund managers congratulated me on the fact that the legislation ended up in an acceptable place with nothing silly, but many resented moving from an unregulated space into a regulated space and, in the words of one manager, “having to spend time reporting things instead of just earning money”. I am afraid that, as a consequence, the legislation became a recruiting sergeant for the Brexit cause, with funds to boot. That is its sad legacy. That little bit of history augments what has already been said.

Further arrangements were introduced for the specific funds we are also talking about: social entrepreneurship funds and venture capital funds. I considered those introductions very useful, not just in their own right but because it represented the first breakthrough where some people recognised that AIFs could be good; they were usually considered to be at the bad end of the spectrum.

I have no comments on the way in which the onshoring has been done in so far as it follows the kind of path we have seen before, with temporary permissions in place until transfer to the domestic regime—in this case, the UK national private placement regime—takes place. I do, however, have a couple of questions, and I gave notice to the Treasury of the first one.

I believe that, in his introduction, the noble Lord, Lord Bates, covered the reasons why there has been a change to the private placement regime’s reporting requirements. The reasoning, which I understand fully, is that EEA UCITs become AIFs and therefore slot into a regime meant to cover the sort of funds used by only professional investors, whereas it has protections that correspond to the retail case from the EEA UCITs. That was given as a reason for changing the reporting requirements for those under the national private placement regime.

However, I do not understand what power the Government are using for that proportionality, and here I refer to what is said in paragraph 7.10 of the Explanatory Memorandum concerning Regulation 10(9)e. Is it a continuation of the withdrawal Act powers or are the Government using another form of empowerment? I did not perceive the withdrawal Act as giving powers to amend the national private placement regime, but I may have missed something in the logic. I hope that there is an answer there; it is quite likely that there is, which is why I gave notice of my question. Paragraph 7.10 also references the “reporting requirements for funds” recognised as retail funds under Section 272 of FSMA. It is true that they are less risky, so less reporting is needed, but where has the power to amend the private placement regime come from? Has it come from FSMA? That may be possible. If so, that should be said. I decided not to spend yet another weekend trying to work out where it came from, but to ask the question instead.

My second question concerns asset stripping. The asset stripping provisions have been contracted to apply only to UK companies. Does that mean that EU funds that are allowed to continue in the UK under the temporary regime can come here to asset-strip EU companies that they acquire? Are we going to get ourselves a bad reputation—“Come to London and we will strip your EU assets”—or are they covered by the built-in requirement of their home member state? Could they separately acquire something that is somehow ring-fenced in the UK? When they are converted to the UK national regime, will it still have all the asset stripping protections? It may not be the place to correct that here but, on a point of information, will our NPPR have UK asset-stripping protections? That was a novel aspect that was introduced into the AIFMD.

I will move on to venture capital and social entrepreneurship funds. When they were proposed, they were said not to be attracting much interest in the UK; people said that we did not need this kind of thing and we had all the funds we needed. I wonder therefore whether there are any figures for the volume of assets under management or sold in the UK using this heading.

We come now to the interesting point I have already mentioned: symmetry and continuity of assets under management. This is an instance of where we are treating the EEA preferentially and not as a third country, so that these funds can still have EEA assets within them, which I fully understand—you would not want to have to rapidly divest assets. But when they were constructed, preferential bias was built in to try to help the EU and EEA companies. Will there be a review of that in the fullness of time, for example to restore in some way the benefit of the UK footprint rather than an EEA footprint? What has been done is sensible in the immediate, but it would be interesting to know the longer-term view, partly because the logic of coming under the same jurisprudence no longer holds. The other side of that is: why not open up so that they can have all funds, including third countries, in them? How are we going to deal with that?

That is probably all that I need to say. My question is, what is the justification? The choice was between three options and the continuity option has been chosen. But where are we going to jump to next? Are we going to shrink back to the UK or are we going to open up to third countries?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting these instruments. I am sorry to sound like a broken record but I want to start with my concerns about the impact assessment. The Explanatory Memorandum says:

“A full Impact Assessment will be published alongside the Explanatory Memorandum on the legislation.gov.uk website, when an opinion from the Regulatory Policy Committee has been received”.


Is the Minister going to tell me that it is also de minimis or is this different from the last one? I had hoped that there would be an impact assessment, because I have absolutely no idea of the scale that we are talking about: I do not know whether we are talking about millions, billions or semi-trillions floating around. I would have found an impact assessment useful.

--- Later in debate ---

[Lord Bates]

I thank the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, for their questions and for their focus on and scrutiny of these important regulations.

I shall start with the impact assessment because there is a different answer to the usual one we have given of “de minimis”. The Government have undertaken an impact assessment on these instruments, which we hope to publish shortly. As a whole, these SIs will significantly reduce the costs to business in a no-deal scenario, as without them the legislation would be defective. In making these changes, we have attempted to minimise disruption to firms and their customers. We have identified the main costs to firms as familiarisation costs arising with the new legislation, transition costs because of changes in legal definitions and changes in the reporting requirements for firms using a temporary marketing permissions regime.

The noble Baroness, Lady Bowles, asked why the asset management stripping provisions have been contracted and how they will apply to EU AIFM firms in a temporary marketing permissions regime. Such firms will be able to market under the same conditions as they could pre-Brexit. That follows the consistent approach we have sought to take in drafting these SIs: by considering how they will work and consulting with the industry. They will therefore be subject to the asset-stripping provisions in their home member state, which of course—without wanting to give the noble Baroness flashbacks to her 20 trilogues in the European Parliament—will continue to govern such activities.

[Lord Tunnicliffe]

If I may gently challenge the Minister, he said that the Treasury has taken a consistent approach with these SIs but it has not. Sometimes it has chosen to be symmetric and sometimes it has chosen to be asymmetric. That may be perfectly reasonable if there is a good explanation—particularly for why it would choose an asymmetric approach—but such an approach, which at least disadvantages some parts of the UK’s financial services industry, should be justified by the fact that it gives greater benefits than not having that asymmetric approach available.

[Lord Bates]

I hear what the noble Lord says. On that particular point, I was referring to the general objective of the onshoring process in which we are engaged. This is to effectively onshore the current rule book to allow for no or limited disruption to UK firms—and, most importantly, their customers and clients—in the unlikely event of no deal. I accepted that point on the previous SI. I will reflect on the point raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about how the choice will be applied in future—how it will be arrived at—and I shall copy them in on my letter.

The noble Lord, Lord Tunnicliffe, asked me to clarify how the passporting regime will work for third countries post-Brexit. The passporting regime between the UK and the EU will cease in a no-deal scenario. There is a third-country passport, which is currently not in force. The SI transfers to the Treasury the Commission’s function of appointing the day when this passport comes into effect. If in force, the third-country passport can be used to allow third-country fund managers to be authorised to manage and market funds in the UK.

The noble Baroness, Lady Bowles, asked about opening up to third countries in the future, which is a pertinent question. This instrument deals only with the inoperability that comes with withdrawal from the EU in the event of no deal. However, the national private placement regime is a functioning regime for any third country to take advantage of.

Financial Services (Implementation of Legislation) Bill [HL]

Lord Tunnicliffe Excerpts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Baroness Kramer]

I say to the noble Lord—and perhaps to clarify for others—that I think there is a real difference regarding the in-flight legislation, which has gone through an extensive European process that we have been engaged in. That is a highly democratic process involving scrutiny and consultation on a scale that we rarely experience here in the UK. It has gone through the Council and Parliament, and the technical language is nearly all in place. That is in a different category from other provisions, which are typically dealt with in the schedule; everything is at a much earlier stage and—if we leave—we will not be engaged in the on-going process that shapes that outcome.

We can look for some flexibility on the first category. I say that in part because we are all incredibly conscious that just getting through the essentials of the legislation on our plate is overwhelming. The last thing I would wish to see is for us to fall out of equivalence by accident, because the Government put elements on which we have been engaged and on which we agree at the back end of their legislative priority list, and we find ourselves by default stepping out of an equivalent situation. That is a concern, and it is one of the reasons why we would like to explore some of the options my colleagues have been outlining.

[Lord Tunnicliffe (Lab)]

My Lords, I think the two groups of amendments in many ways cover the same issue. They are essentially about how much flexibility the Executive should have in using this new law. Taking noble Lords back to the creation of the withdrawal Act, it was an extremely painful process because we were naturally reluctant to give the extensive powers in the withdrawal Act to government. But we were in a sense battered into the very realistic understanding that, given the volume of work that had to be done, the only way to do it was through statutory instruments enabled by the withdrawal Act.

--- Later in debate ---

[Lord Bates]

My Lords, I thank noble Lords on all sides for their constructive suggestions during this short debate. I am grateful for these contributions. The noble Lord, Lord Tunnicliffe, made a fair point about the approach we have taken on considering secondary legislation in Committee. We have brought through 16 statutory instruments so far—we have the joy of another four awaiting us in Grand Committee tomorrow afternoon—out of a total package of some 60, 47 of which will use the affirmative procedure. So there is an element of scrutiny. The noble Lord rightly focused on the provisions of the EU withdrawal Act, which is the substance of Amendment 7, but then we were dealing with known entities and rules.

In introducing this amendment, the noble Baroness, Lady Bowles, made a very fair point and the noble Baroness, Lady Kramer, added to it. If I am paraphrasing her correctly, she recognises that, had she not been there, the legislation coming across to us might not have been dealt with in the interests of the United Kingdom financial services industry. I agree with that, from what I know of her role on that committee in that Parliament. Her input—and that of other members—at that stage was vital in shaping the legislation which subsequently came across. We thank her for that service. She is no longer there and, in the scenario for the future files that we are dealing with, neither will her successors be. Therefore, there needs to be a difference in the way these are treated—between the narrow definition in the EU withdrawal Act, when we knew what we were dealing with, and directives and regulations into which we may have had no input and no responsibility for shaping. These could, potentially, be damaging to the UK financial services industry. There is a long way to go with this debate, but that is the crux of it.

I turn to Amendments 2, 4 and 6, the aim of which is to require the publication of a report three months prior to the exercise of the powers under the Bill. This report would need to explain any policy adjustment or decision to omit aspects of the originating file. The noble and learned Lord, Lord Judge, also referred to this. I reassure noble Lords that the Government’s clear intention would be to set out this information in the reports currently required by the Bill.

Further to that, as is standard practice, the Government would of course seek to engage with interested parliamentarians and the industry on the legislation before taking any statutory instruments forward. Where the secondary legislation omits aspects of any EU files, it would certainly be in the public interest to be open about the choices the Government have made in not implementing them.

Regarding the requirement to publish the reports three months ahead of each exercise of the power, the Bill currently sets the requirement that any implementing legislation be subject to the affirmative procedure. This would require laying the relevant statutory instrument before Parliament, and an accompanying Explanatory Memorandum setting out the policy intent, before the debate on the SI itself and well ahead of implementation. This is the established process for scrutinising such statutory instruments and for this reason it is the model we have chosen to follow.

I am also mindful of the fast-moving nature of financial services. In particular, there may be a need to respond quickly to market developments, and it may be important to avoid imbalances with the EU for even a short period—for example, where the files may be of a deregulatory nature. With respect, I suggest that a three-month gap between a report and laying is too long to respond to market developments. Such a three-month requirement would place at risk the basic aim of the legislation, which is to safeguard the reputation, competitiveness and efficiency of UK financial markets. However, having listened to the points that the noble Baroness, Lady Bowles, made in moving her amendment and to the subsequent points of the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, I am willing to consider, ahead of Report, exactly how a process might run in the future to keep noble Lords better informed. Just to manage expectations, we will probably regard three months as too long for what might need to be very fast changes to ensure that UK financial services are not disadvantaged, but I signal my willingness to discuss the issue with the noble Baroness and see whether we can find an acceptable way forward.

[Lord Tunnicliffe]

Does the Minister accept that the problem he faces is bigger than that? It is not just about this group but about the fundamental fact that we parliamentarians dislike secondary legislation that changes the law. He faces a significant defeat in this House if we cannot come to some compromise agreement that seriously limits the ability of the Executive to impose law upon this Parliament. It is important that he recognises that—otherwise, we will end up deciding what the Bill says, and that is usually not good in terms of using the law in the future.

[Lord Bates]

I am always willing to engage and it is helpful, if I may say so, to engage in that debate, because the point the noble Lord is making is more on general principles than on detail. I subscribe to that, provided that we can agree to recognise that what the Government are seeking to do here is to deal with, effectively, processes that I am not aware have ever been dealt with before. We may be giving an undertaking to implement certain directives and regulations over which we have not had control and of which we do not yet know the precise nature. That is a different challenge from the normal routine of the types of onshoring that we are doing with the other statutory instruments. I am prepared to accept the noble Lord’s point if he will recognise the difference that we are dealing with between those two different types: that would be helpful.

[Lord Tunnicliffe]

I recognise that there is a difference, but at the end of the day my noble friend Lord Adonis’s point is valid: in day-to-day life the world changes, we have to react quickly to it and, where needed, we have to enact primary legislation. We are not creating a new environment where the Government enjoy executive power to change the laws in this area; surely we are seeking only to manage the transition. I do not see that it is the end of the world if the Government see something develop in Europe, say it is wrong, and say that that will not be covered by this Act and that we will have to bring forward primary legislation. We have done it in the past and we will have to do it after two years; that is the way new ideas should be introduced to this Parliament.

[Lord Bates]

I hear what the noble Lord is saying. Without wanting to rehearse Second Reading again or to undermine any of the progress that I feel we have already made on this in Committee, I will conclude by saying that from my perspective, the noble Baroness has made a proposal to deal with the length of time and the reporting—to address the noble and learned Lord’s point—about where there are changes, what changes have been made and why, and whether that report could be received in advance of the statutory instrument being laid and then debated in the House. In the spirit of recognising the points referred to, I have said that I am prepared to look at that. Three months may be too long but I am prepared to have a discussion ahead of Report on whether another time period may be more acceptable. With that, I hope that the noble Baroness will feel able to withdraw her amendment.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, we are superficially attracted to this amendment and we await the Minister’s comments with interest.

[Lord Bates]

I thank noble Lords for their contributions to this debate. I shall begin by looking at what I think is an area of common ground: we all recognise the importance of the financial services industry to the UK. Perhaps I may pick up on a point made by my noble friend Lord Flight, that one of the main purposes of this Bill is to ensure that the UK remains an attractive and competitive place to do business, retaining our place as a world leader in financial services. To do this in a no-deal context, it is essential that the UK retains sovereignty over our rules. From the perspective of financial stability and protecting the UK taxpayer, it is essential that the Government, the Bank of England and the FCA have the tools available to ensure that the UK markets are appropriately and effectively regulated.

It would be wrong to set a condition over the UK’s regulatory framework that means decisions which are made about the UK’s future regime are determined through the lens of maintaining equivalence to the EU, irrespective of the quality of those rules and how future legislation and the market itself may evolve.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.

One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.

I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.

[Lord Tunnicliffe]

My Lords, listening to this debate, one cannot but feel that this is about a policy decision. The last thing I want in this Bill is policy decisions which will introduce different levels of regulation and proportionality. That may not have been the intention. I did not find the words very attractive because they led me to all sorts of different scenarios. I think I heard it advocated as quite a narrow concept to provide against unintended consequences as a result of slavishly transcribing a piece of legislation. If that is the intention, it may have some attraction, but as drafted, the narrowness of that is in no way clear and the breadth of it would involve serious policy changes. It is not the purpose of this Bill to introduce serious policy changes.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I agreed with the amendments of Lord Adonis; I do not agree that they are not needed, even with Amendment 7. There is still the issue of sequencing in terms of what is and is not being done; Amendment 7 does not solve the cherry-picking point or various other things. I attach quite a lot of importance to the reports provided by subsections (8) and (9). In that context, I read the amendments that added in the Bank of England. The noble Lord has explained that in the sense of taking advice from the Bank of England. But when doing these transpositions, there are inevitably delegated acts and other associated things that will be done at the level of the regulators and will not even be contained in a statutory instrument. Therefore I thought it was right that the regulators reported how things are dealt with as well as the Treasury. I support the amendment but would add the PRA and the FCA. In that way, we get the full Treasury report through to the regulators, so that we see that we are all on the same page and where the tweaks, even within the available limits, are made. So I agree with the noble Lord.

As to whether Amendment 11A is needed, there is no harm in putting it there. The Secondary Legislation Scrutiny Committee and other committees will still be doing their part when the things come to them, so I see no reason not to give some work to the Treasury Select Committee.

[Lord Tunnicliffe]

My Lords, we have an open mind on the amendments. The noble Lord, Lord Deben, hit the nail on the head in saying that the gap between primary legislation and the SI process is too wide. Since we are shovelling a lot of stuff into the statutory instrument process, this is a good time to consider some intermediate action. I do not move from my commitment to tighten up what is available for secondary legislation under this Act, and we will be pursuing that, but I shall listen to the Minister’s response with care to see whether this would be the occasion to make some progress in this important area and give two views of a piece of secondary legislation, instead of the usual process. No matter how hard the Minister and I, and colleagues on the Liberal Democrat Benches, try to give some life to the affirmative SI process, we know in our hearts that we are not going to vote against it because we are not going to provoke a constitutional crisis. Some process in between the two—this may be the right one—deserves careful consideration.

[Lord Bates]

I thank the noble Lord, Lord Adonis, for introducing his amendment, and all noble Lords who have spoken. I will touch on some of the points made, but before I do, perhaps I may say that, as we are moving rapidly through the different groups, it is important that we keep updating where we are. In earlier groups, I was responding positively to my noble friend Lord Deben’s point that the legislature needed to be better informed about the effects where changes are made and where we are derogating from existing directives that are in flight. I dealt with the concerns that had been raised by the Delegated Powers and Regulatory Reform Committee, and agreed to meet and talk further about them—so as we move along I do not want to lose sight of the fact that this is an unfolding story. Already, three hours into Committee, we have agreed to undertake and look carefully at some of the points raised.

I recognise the immense wealth of expertise which is here, not least in ministerial office from the noble Lord, Lord Adonis. I would not dare try to calculate the years of ministerial office represented by my noble friend Lord Deben, especially when I have my noble friend Lord Young of Cookham to my left; between them they could put up a cricket score of years.

There needs to be proper scrutiny; I accept that. The Secondary Legislation Scrutiny Committee already scrutinises all instruments laid before each House that are subject to parliamentary proceedings, and it is required to draw to the special attention of the House those instruments which are politically or legally important, or which give rise to issues of public policy likely to be of interest to the House. In addition, Standing Orders set out that the Joint Committee on Statutory Instruments must report on affirmative statutory instruments before debates can be scheduled. This is the established process for scrutinising statutory instruments, and it is a model we have sought to follow.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I have Amendment 16 in this group. As the noble Lord, Lord Hodgson, said, I added my name to his amendments and I thank him for trying to bring some better order to the reports and to increase the frequency with which they are produced. Amendment 16 says that the reports must include a table setting out which provisions of the financial services legislation have been transposed into domestic legislation, and under which statutory instruments. I ask for that because it is awfully difficult to know where things have been put. The Minister will recall that on several occasions when we have been discussing statutory instruments under the withdrawal Bill, I have had to go hunting for the articles of the legislation that has been transposed, and they have popped up in a different instrument and sometimes been dealt with at rather different times.

If that kind of thing is going to happen again, we need the safeguard of knowing where things have been put. In European parlance, this was called a “coronation table”, which showed where the European legislation ended up. One does not necessarily need to do that going forward, once we are amending under our own rules, but something like it would be a first step to obtaining equivalence, because we will also have to demonstrate to the EU where everything has been put. Therefore, this seems a useful addition to these reports, thereby keeping Parliament informed about how things are progressing.

[Lord Tunnicliffe]

My Lords, we have constantly been debating the same issue, which this amendment addresses from another direction. I am afraid that my experience of government producing annual reports is that, on average, they tend to appear every 18 months, rather than 12 months. I am not quite sure what the last report of the two does anyway, and the idea of one meaningful report every six months has a lot to commend it. Being prescriptive about its contents would also be quite useful, and I look forward to the Minister’s response.

[Lord Bates]

I thank my noble friend Lord Hodgson for ably introducing this amendment. A substantial part of my speaking notes is remarkably similar to those for Amendment 2, when I responded to the comments made by the noble Baroness, Lady Bowles, on early reporting. Again, we have made some progress, so let us perhaps just leave that on the record.

I will make a couple of specific points about my noble friend’s amendments, and those which the noble Baroness, Lady Bowles, has put her name to as well. These amendments would require the Government to lay reports on the use of the power every six months, rather than every year; to set out why the power would need to be used; and to include a table setting out the provisions of the EU legislation that have or have not been transposed into domestic legislation, as the noble and learned Lord, Lord Judge, mentioned in an earlier debate. Again, I can assure noble Lords that the Government’s intention has always been to set out such reasoning and detail as part of the reports referenced in subsections (8) and (9).

As to the frequency of the reports, the current drafting has been designed so that the reports will provide an overview of how the powers have been used in the first year, and how the Government propose to use them in the second year. The intention behind this is to allow enough time to pass for a meaningful report to be drawn together. I hope this helps to clarify the Government’s intention to be as transparent as possible in the exercise of these powers.

As with the amendments tabled earlier by the noble Baroness, Lady Bowles, I have listened carefully to the arguments being presented on all sides, and particularly in this instance by my noble friend Lord Hodgson. It may be that we need to consider further exactly how such a process can run, so that we can provide the House and Parliament with the necessary assurances that it seeks. In that regard, I ask my noble friend to withdraw his amendment, given my commitment that we will look again at this issue and seek to make some constructive suggestions on a new way forward at Report.

Offensive Weapons Bill

Lord Tunnicliffe Excerpts

2nd reading (Hansard): House of Lords
Monday 7th January 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, after repeated delays in the other place, I am pleased that today we have the opportunity to debate this much-needed legislation at Second Reading. My Front-Bench colleagues in the other place have made it clear that efforts to tackle the sale and possession of acid and the growing knife crime epidemic would be welcomed by these Benches so, although lacking in some areas, the Bill and its limited measures have the support of the Opposition. Needless to say, we will seek to amend the Bill at later stages, but with our support for the legislation assured, I hope the Minister will engage constructively with our efforts to improve it.

We should not underestimate the challenges ahead in making our communities safer. In the 12 months leading to March 2018, England and Wales saw a 16% increase in knife crime. In total, there were 40,000 offences—the highest number since 2011. That rise is backed up by NHS hospitals in England, which recorded a 7% increase in admissions for assault by a sharp object, while the Office for National Statistics confirmed that this represents a “real change” in incident numbers. While some communities have been worse impacted than others, the issue of county lines is seeing gang violence and serious crime find a way into towns across the UK.

The issue is not isolated, nor is it contained. With surging crime and falling charge rates, the Bill is a missed opportunity to address the wider issues leading to this surge. If we are to turn back the tide and guarantee safer communities, we must begin by equipping the police to best offer their protection. Aside from Lithuania, Bulgaria and Iceland, this Government have cut police numbers more than any other developed country. We have lost 21,000 police officers, over 18,000 police staff, and around 7,000 community support officers. If the Government are to put the police on the front foot to tackle violent crime, they must first build the front line back up.

In addressing the factors behind serious crime, the Government should also consider the need for greater early intervention, which the Bill fails to tackle. Time and again, the precursors to articles in the press about violent crime are the same tragic stories of vulnerability, abandonment and exploitation. The reduction in youth workers, the neglect of children leaving care and the cutting of local government funding used to provide support have only spurred on the problem. As public services are stripped back by cuts, the same patterns emerge of individuals in need of help instead turning to crime. The Government must do more to protect the most vulnerable in society, and it is disappointing that the Bill has not been used to meet calls to tackle these root causes.

In the past, we have heard reassuring comments by the Secretary of State recognising the importance of early intervention, but that has not been reflected in the actions of the Home Office; nor has it been reflected further across Whitehall. The reality is that spending on crime prevention by local authorities has been cut in half since 2010. In real terms, £1 billion has been taken from children’s services since 2012 and £2.7 billion from school budgets since 2015. There can be no doubt that this has contributed to wider societal problems, which have fuelled violence and crime. The Government must commit to greater social cohesion and early intervention, and it is a shame that the Bill has not been used to do so.

The Government also need to make more concerted efforts specifically to overcome gang violence, and the omission of steps to do so in the Bill is disappointing. It has been estimated by the Children’s Commissioner that around 70,000 of those aged under 25 are involved in gang networks, yet the fund for ending gang violence and exploitation has been given only £300,000 as part of the Government’s flagship strategy. We also need to see further efforts to combat county lines—an issue which has seen greater prominence since the introduction of the Bill. I am concerned that the Government do not understand the urgency with which the public want to see this issue sorted. Repeated concerns have been raised over the lack of prosecutions despite significant media attention. In October, I was pleased to see an announcement of the first county lines prosecutions under the Modern Slavery Act. I hope this House can explore whether further measures can be introduced at later stages best to equip police forces to put an end to the misery caused.

I am further disappointed that for the victims of crime, again the Bill offers little. In the Conservative Party manifestos of 2015 and 2017, pledges were made to legislate for the rights of victims, who are too often left in the dark by the criminal justice system. There is no sign of this in the Bill or across the Government’s wider agenda. We have heard calls for safer staffing levels in the ambulance service and the NHS to protect those who become victims of the weapons the Bill hopes to tackle, yet there is no sign of provisions to improve the situation, either in the Bill or across the Government’s wider agenda. In legislating for safer communities and to tackle violent crime, the voices of victims must be front and centre, yet those voices have again been ignored by this Government.

Moving on from what is omitted from the Bill to how measures can be strengthened, I am sure noble Lords will recognise that firearms regulations in the UK are among the world’s strongest, and the provisions in the Bill to complement and strengthen them will, I hope, be welcomed across this House. However, as restrictions have developed and extended in recent decades, we must recognise how criminals have adapted to restricted supplies, including by repurposing obsolete firearms and through the increasing trend of legally held firearms being stolen from certificate holders. These loopholes allowing gun ownership are, in the word of some of the most senior counterterror officers in the UK, “glaring”. Of course, we must also be alert to the threat of higher-calibre weapons, and it is greatly disappointing that, despite overwhelming evidence of the danger, supported by the police, the Government have succumbed to their own Back-Benchers and removed these provisions. The police have made clear that they have no known protection against these rifles. There can be no justification for any individual owning one. We will confront this issue in the later stages of the Bill, and I hope the Minister will recognise the strength of feeling across both Houses, not just from a narrow wing of her party.

The measures relating to corrosives are, again, welcome but do not go far enough. The disturbing trend of individuals using these substances to cause harm has created great concern following high-profile incidents across the UK, and it is right that the Government are seeking to restrict their possession. Unfortunately, the Bill falls short of fully recognising the danger they can cause and leaves their restriction on a lesser pedestal than other weapons. The Bill also fails to acknowledge the spate of so-called fake acid attacks where individuals have been threatened with a non-corrosive substance in a manner which gives cause to believe it is indeed a corrosive substance. We cannot allow individuals to capitalise on fear without consequences. We must tackle this threat head on with the severity it deserves.

Finally, I come to knife crime and the Bill’s provisions relating to bladed weapons. The measures relating to remote sales are particularly welcome, as are those for residential premises but, as I mentioned, we must adapt to changing threats and consider the other ways in which weapons are obtained for violent crime. There are different purchasing platforms and different weapons that we must understand, and I look forward to the House considering measures to confront them. There are also questions to be asked about why higher education premises have not been recognised on the same level as further education premises in the prohibition of possession, and there is cause to believe that these have not been fully answered in the other House.

I will touch briefly on an issue that USDAW, the shop workers’ union, has campaigned on extensively. As the House will be aware, the Bill creates a number of statutory duties for shop workers who sell objects that can be used as weapons. We can expect those performing these duties in shops to encounter individuals who choose to threaten or, worse, attack them for acting responsibly. We must ensure that shop workers have the utmost protection under the law, and I hope the House will consider how this can be provided for in the Bill. Unfortunately, efforts to amend the Bill to reflect such protection were resisted by the Government during the Bill’s passage through the Commons, and I hope Ministers will be prepared to engage better on this issue during its passage through this House.

Earlier, I told the House that the Opposition will not stand in the way of the passage of this legislation. Our issues with the Bill are largely to do with what has been omitted rather than what has been included, and I urge the House to look beyond the narrow measures currently contained in the Bill and to consider the greater causes behind serious violent crime. The spike in incidents that we have seen in recent years will not be cancelled out until we look beyond the face of the crime and consider how front-line police cuts, the neglect of youth services and the abandonment of early intervention have contributed to a melting pot that has allowed violent crime to emerge as an epidemic.

In finishing, I briefly remind the House and the Government of the UK’s restrictions on the availability of weapons, which are among the most respected in the world and testify to cross-party efforts under Governments of all colours. Therefore, I sincerely hope that, as the Bill progresses through the House, the Government will take heed of precedent and reflect concerns raised by both sides of this House.

--- Later in debate ---

[Lord Lucas]

The usual channels do not rule this House; we do. It is our decision. If the Minister wishes to call a vote, that is fine.

[Lord Tunnicliffe]

My Lords, I join the Opposition Front Bench in asking the House to respect the tradition that the Government Chief Whip controls the business. The adjournment is appropriate; it is a matter of the business of the other House starting on time. The delay will not be a couple of hours, but exactly the delay advertised in today’s business.

[Viscount Younger of Leckie (Con)]

My Lords, I have just been given notice that the health Statement has now started in the Commons. We have a difficult decision to make. With the will of the House, we will continue the debate and finish it.

Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 12th December 2018 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, probably few if any other people would stand up and say that CRD IV is their favourite piece of legislation, but for a variety of reasons it is my favourite. I do not mean to alarm the Minister or his officials by that, because we seem to have stuck within the rules of onshoring and the transfer of powers in the way with which we are now familiar. However, inevitably that process opens the door to future changes without it having to return to Parliament, as is the case in the EU, because a lot can be done via the interpretation of binding technical standards—if not immediately then at the next stage. It is not entirely clear from the explanation and from what is set out in the Explanatory Memorandum whether the binding technical standards will essentially just replicate what we have at the moment or whether they will make additional policy changes; that is, is it going to stay entirely within the “no policy change” of the withdrawal Act, or will changes be made simultaneously or subsequently?

For now, I want to concentrate on two points of personal interest. The first is the change to what counts as zero-risk weighted sovereign debt. This has long been a pet subject of mine and now it has become mainstream—in particular, that zero-risk weighting is actually inappropriate for eurozone sovereign debt because the European Central Bank cannot print money, although it has done a pretty good approximation of that in recent years. It would be interesting to explore a little more the effect of moving the zero-risk weighting from non-UK sovereign debt, given that sovereign debt is the main tier 1 liquid asset for banks. Will that mean that there is an incentive to reduce diversification in liquid assets?

More generally, how are banks currently dealing with sovereign debt in their risk calculations? The international banks most likely to have other EU sovereign debt can, and probably should, be using internal models to calculate risk rather than rely on the standard model and therefore the zero-risk weight. However, when I looked at this a while ago, the risk allocated in that way seemed to be pretty minimal, and I wonder whether that is still the case. Will minimal risk in the internal models be affected once the near-zero justification has gone? Also in the past some large banks have availed themselves of permanent partial use as a standard model under Articles 149 and 150 of the CRR, the reasoning being that it would otherwise be rather complicated due to holding a lot of different sovereign assets. Of course, Articles 149 and 150 will now apply only to UK sovereign debt, so what will happen there? Can the Minister also advise whether any UK banks are still using Article 150?

The second point I want to raise out of interest is the country-by-country reporting which comes from Article 89 of the directive and has the distinction of being enshrined in the EU withdrawal agreement as part of the BEPS commitments. The particular matter I want to highlight is that the onshoring has replaced the reference to the EU directive 2006/43/EC on statutory audits and annual accounts with the words:

“International Standards on Auditing (United Kingdom and Ireland) issued by the Financial Reporting Council Limited or a predecessor body”.


Frankly, I wish that it had not done that. At present, we have both the Kingman inquiry into the future of the FRC and the Competition and Markets Authority inquiry into audit, which encompasses the FRC and standards matters. I would expect a certain amount of criticism of the way in which the standards as applied in the UK under the FRC have not measured up to the company law of either the UK or the EU. So is that a future-proof amendment, given that the inquiry reports possibly as soon as next week?

On bank recovery and resolution, I am very happy to see the FSB key attributes referenced as a default. I spent quite a lot of time in Brussels having to wave those around during negotiations when things were going in slightly the wrong direction from time to time. As a practical matter, does the Minister consider that there is a substantial difference caused by being in only the international crisis management groups of a bank rather than in the full EU resolution procedures? I repeat my references to what the BTS are going to be doing, given the reference in paragraphs 7.19 and 7.20 in the Explanatory Memorandum. Does that suggest two lots of consultation, or is it just the same lot?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting these two instruments. I cannot but agree with the early paragraphs of the Explanatory Memorandum—which is the same in all these Explanatory Memorandums—that, essentially, if these instruments end up being used, it will be in a no-deal scenario, which would be disastrous for the United Kingdom.

Having had an original career in aviation, I intellectually accept that it is right and proper to prepare for all credible scenarios. That is what we are doing today, and we will do it in the usual polite way about another 40 times between now and the end of March. But, today of all days, one has a feeling that the no-deal scenario has crept a little closer, and I have almost a sense of being asked to dig my own grave against the possibility that extreme Brexiteers will win the day and we will end up in a no-deal situation.

The European Union (Withdrawal) Act highly limits what we are doing here, and I hope that the constraints of that Act are being fully respected. We are not here, frankly, to debate the merits of the instrument; we are here to debate whether it stops within the agreed constraints, which are rehearsed in many places. Perhaps the strongest sentence is in paragraph 7.4 of the Explanatory Memorandum, which states:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.


The process called for by the Act, in a sense, divides into two. The first part of the process, which is true of all the things we discuss today, is to reassign responsibilities—in other words to recognise that appropriate authorities are necessary for the business of the various Acts to work and they have to be moved from EU institutions into UK institutions. The second is to make policy changes within the strict limitations of the sentence that I just read out.

Discharging our narrow duty to ensure that the Government have stuck to the rules is very difficult to achieve. In theory, we could go through each SI, line by line, regulation by regulation and Act by Act to see if that is possible. I recognise that the wisdom of the noble Baroness allows her at least in part to do that, but I am afraid that with our available resources that is not possible. A poor second to that is to skim the document and look at its structure and the language that it uses.

Let me take the bank recovery and resolution SI first. It looks as though the reassignment of responsibility has been discharged because, in page after page, one finds that it takes a responsibility from an EU institution and moves it to a UK institution. However, the area that I am particularly concerned about is where the instrument uses entirely new language, because it seems to me that, where there is entirely new language, I have no way of knowing whether policy variations have accidentally arisen. Therefore, I am very surprised to see areas of entirely new language, because I would have assumed that the object of the exercise is to take rules presently in place and translate them into English law.

The most dramatic example of that is on pages 41 and 42 of the bank recovery and resolution SI, where there are two pages of fresh language that talk about the recovery plan that institutions must put in place. Now, I assume that the requirements for that plan are already effectively enacted at this time. Why, then, is it not written over—or whatever the right term is—or why is it not referenced back into the law as it exists today, so that we can see that there is no change in policy? I ask that question to see whether there is any new thinking buried in the text, and I would value an assurance from the Minister that there is good reason why those parts of the instrument are written in fresh language, as opposed to being cross-referenced to language that already exists.

In the second SI, on capital requirements, there is a clear policy change, which is there because the situation demands it. The change, as has already been spoken about, is the recognition of EEA countries as not being of zero risk and hence requiring a capital buffer. In a no-deal scenario, after 29 March such sovereign debt will have to be assigned a risk factor. Surely this will put UK banks at a commercial disadvantage. It is no good to give as an excuse, as is done in the impact assessment—and it was great to see an impact assessment, by the way, so I must put that on record—that most institutions will use the “internal ratings based” approach. While assigning risk to EEA loans is not mandatory with the IRB banks, if they do not take account of the fact that, for other purposes, such assets will be recognised as having some degree of risk, one would hope that this would be challenged by the regulators. Does the Minister agree with that analysis? Why did the impact assessment not look at some way of maintaining the status quo? For instance, it might have contained a statement that the sovereign debt of EEA countries would be treated as zero risk, or it could have included an order-making power for the Treasury to define individual countries as having zero risk.

Payment Accounts (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 12th December 2018 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord, Lord Bates, for his introduction and the noble Baroness, Lady Drake, for drawing attention to the report of the Secondary Legislation Scrutiny Committee’s Sub-Committee A, on which I sit, so I do not have to do it. With the state of my voice, that is welcome.

The issue of note here is that an obligation to service non-UK residents is removed. Many of these will probably be UK nationals and will probably come to the UK sometimes, even though they are resident elsewhere. I am sure that this will be an inconvenience and that is greatly regretted. In the interests of saying that this is not being reciprocated, there has been a lack of generosity of spirit in this statutory instrument. Can the Minister confirm whether there would be any supervisory pressure, under “know your client” provisions, for these accounts to be closed? Will supervisors make it more awkward and put pressure on the banks so that closure is de facto the most likely event?

I also remind the Committee that one of the purposes of this legislation was to ensure that basic bank accounts could be opened in advance for people who were moving around for the purposes of work. Otherwise, you get into a Catch-22 situation where you cannot get a permanent place of residence until you have a bank account and you cannot get a bank account until you have a permanent place of residence. While I was an MEP, I got this in my postbag. Indeed, one of my own children had this problem. We were constantly having to intervene to get these things sorted. If we want to encourage talent and still allow it to come to the UK, why make it awkward? I am sure that those who come for big and well-paid jobs may find that they can open accounts, but what about the more ordinary person? I think that, actually, this is a very bad measure.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this instrument. When I first read the Explanatory Memorandum, I thought it was good and it convinced me that, broadly speaking, the instrument was doing its job. Then my noble friend Lady Drake decided to share her speech with me and I realised that perhaps I had not fully understood it, but by this point in the proceedings, the Minister had enough questions to answer anyway without me inventing any more.

The point that has come out of the last two speeches is important. The Government often conclude that an impact is minimal because it affects quite a small number of people. The problem with that attitude is that for the people it affects, it affects them 100%. If you cannot get a basic bank account, that is pretty close to catastrophic in the modern world, so I hope that the Minister will have good answers to my noble friend’s points.

My question is one that runs through many of these SIs—the lack of formal consultation. The consultation paragraph states that there has been discussion with “relevant stakeholders”. One has an uncomfortable feeling that the relevant stakeholders are in fact the financial institutions themselves and not the key relevant stakeholders—the consumers. I would be grateful if the Minister could tell us who the relevant stakeholders were and whether they included consumer representatives, and, if not, why not?

[Lord Bates]

I thank noble Lords for their contributions. They rightly focused on basic bank accounts and the impact on people who are potentially vulnerable. I will try to offer some reassurance.

The noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake, asked about the consultation. The Treasury engaged with UK Finance, the Financial Conduct Authority and the Payment Systems Regulator to ensure awareness of these changes. The Treasury published the draft instrument and Explanatory Note on 31 October. We also notified leading consumer groups after the publication of the draft instrument to ensure awareness of these changes. We have not received any questions since publication. That may well change as a result of noble Lords’ comments today.

The noble Baronesses, Lady Drake and Lady Bowles, asked how many consumers and basic bank accounts will be affected by the changes. Customers legally resident in the UK, whether UK citizens or otherwise, who hold a basic bank account at one of the nine designated providers will not be affected, as the SI ensures that the nine providers must continue to offer these to qualifying customers.

The noble Baroness, Lady Drake, asked specifically about the impact of the SI on consumers. The impact on the majority of holders of payment accounts in the UK will be minimal. Basic bank account customers may experience a reduction in service as their providers are no longer required to give them access to, for instance, non-sterling EU transactions, although they may still choose to do so if they wish. It will be at the discretion of the providers whether they continue to offer new basic bank accounts or keep existing ones open for customers resident in the EU. We expect that that will affect very few. I accept the point made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake, that it may have an impact on those people and I will try to give some reassurance in that respect.

The noble Baroness, Lady Drake, asked why it was necessary for the SI to remove the EU residency requirement. Maintaining that obligation on the nine basic bank account providers would be inappropriate in a no-deal scenario when the UK will no longer be part of the EU single market for financial services. She also asked what happened to UK expats who live in the EU and whether they could open new basic bank accounts. Eligibility for basic bank accounts is dependent on residency, not citizenship, so that would be a matter for the member state and the laws that apply there.

The noble Baroness, Lady Drake, requested an assurance that residents will not be in financial difficulty. The spirit of the 2014 agreement, to which I referred in the previous debate, is to provide for the most vulnerable in society. The Government expect banks to honour that agreement in making any changes. The noble Baroness also asked whether the statutory instrument prevents the cross-border opening of accounts. The changes in this statutory instrument only remove the requirement for firms to provide certain support to customers who wish to switch their payment account from the UK to the EU. They do not affect a UK customer opening an account in the EU.

Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

I can accept the need for emergency powers in the event of a chaotic, no-deal Brexit. I can accept trying to work out where they might be—perhaps matching changes that the EU is in the process of making—and I acknowledge that hard work is being done by all. However, I do not accept pretending that transparency measures will be preserved when they will not, and I object to removing waiver use publication and depriving the public of information on market developments without a better explanation.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting the instrument and I thank both noble Baronesses for the variety and depth of their questions. I tried to understand the instrument—I put quite a lot of effort into it—and I thank Treasury staff for helping us to do so. I came across a clear need for the maintenance of MiFID II in our law; I accept entirely the general direction of the instrument towards preserving it. Fortunately, I did not come into contact with the entire 900 pages, which is probably the only reason I can claim for still being sane.

I came across some of the concerns that have been expressed. The most worrying area, at least to me, is the temporary powers that the FCA is to have. Why has the SI not been delayed until we have sight of the FCA’s statement of policy on the use of temporary powers? No matter how expert one may be, we do not have a clear view of what powers we are giving away and what impact that may have. If that is not possible—clearly, that is the Government’s position—surely the statement of policy should be brought before Parliament. Its impact will be as big as that of granting the concept of temporary powers.

Can the Minister assure us that in those four years, the temporary powers will not be used to water down MiFID II? That seems an important step towards transparency in these intricate markets. I can see why the industry would want those watered down. It is crucial that the Government be able to assure us they will resist that, and that the temporary powers will not be used to water it down.

Finally, I would like to come back to the FCA having sufficient resources. In the past, the most detail the Minister has given is to say “it will have sufficient funds because it will be able to pre-set the industry, so funds are not a problem”. The noble Baroness hit the nail on the head: it is not about funds but available pools of talent. In the letter the Minister will undoubtedly write concerning this instrument, could we have some clarity, direct from the FCA, on why—in this very highly paid industry, where there is strong competition for talent—it is so confident it will be able to access the available talent to do the task required for this SI and the others considered today?

[Lord Bates]

My Lords, at this hour a letter is an attractive proposition. I counted some 27 questions, which is a pretty respectable ratio from the three distinguished speakers in this debate. I will try to deal with as many as I can in the time available. Clearly, I will have to read the Official Report with officials to see if there are any points we need to write on; I suspect there will be. Therefore, if we run out of time, I will include other answers in that communication.

The noble Baroness, Lady Bowles, asked why the amended thresholds which appear in Article 5(1)(a) and 5(1)(b) of the Commission of Delegated Regulation 2017/567—thresholds for determining which equity instruments are liquid—have not been changed. However, replacing references to Union data with UK market data in the legislation would change which instruments were classed as being liquid for UK market participants.

On the FCA not having the data, it needs sufficient time to build systems to analyse market data independently from ESMA. It estimates that this will take four years. As noted, the Treasury can end this period earlier if the transparency regime cannot operate earlier. The FCA does not have all the data relating to firms in the UK, as EU firms currently report back to their own competent authority and not to the FCA.

--- Later in debate ---

[Lord Bates]

That is a good one for the letter. We will certainly address that point; it is a legitimate question to ask.

The noble Baroness, Lady Bowles, asked whether the FCA consultation was timed to come out after the debate should have occurred. No, the FCA operates completely independently of the Treasury. She also asked whether we had considered keeping the post-trade transparency even if pre-trade transparency is suspended. Simply replacing references to EU market data with UK market data in the legislation will result in significantly different calculations and thresholds for market participants. The FCA can use the data available to it. The intention is to maintain the outcomes of the transparency regime. Transparency will continue to operate during the temporary period.

The noble Baroness, Lady Drake, said that the instrument should not set bad precedents. It has been drafted in accordance with Section 8 of the EU withdrawal Act, and some policy changes are an unavoidable result of addressing deficiencies. We have sought to maintain the intended policy outcome of the legislation. She asked whether a sudden change in the requirement would be hard for firms to deal with. We have announced plans to grant the regulators temporary powers to phase in new requirements that would apply to firms in a no-deal exit. Those powers must be exercised by the regulators in accordance with their statutory objectives, as set by the FSMA. This is a sensible measure to ensure that firms have the time needed to adjust in an orderly way.

The question about whether the FCA has enough human capital to carry out its functions and responsibilities is interesting, I undertake to feed that point back to it, and it may feel better placed to respond. The FCA has reported to the Treasury that it is confident that it will have sufficient resources to operate the transitional transparency regime, due to the preparations that it is making. As it set out in its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit.

The noble Baroness, Lady Drake, asked about the Secondary Legislation Scrutiny Committee report saying that the powers could have been made available to the House before the debate. Unfortunately this was not possible because the FCA had given priority to making regulatory rules fit for purpose in a no-deal scenario, to avoid significant disruption of financial markets. It would also be unusual for the FCA policy to be ready prior to the passing of legislation to which it relates. She also asked about the scale of what was covered—

[Lord Tunnicliffe]

In my experience it is not unusual for enabling legislation to be accompanied certainly by draft regulations. Often the House has demanded that, to give it proper comfort that it is right to give those powers.

[Lord Bates]

We are not talking about the secondary legislation; we are talking about the statement—but I take on board the noble Lord’s point.

The noble Baroness, Lady Drake, asked how many firms would be directly impacted by the SI. The answer is approximately 3,300 UK firms and 1,650 EEA firms. The FCA estimates that changes to reporting requirements and IT processes will affect approximately 1,500 branches of EEA firms, and that this will result in a one-off cost to business of £8.75 million.

The noble Baroness, Lady Drake, asked whether the statement would be ready. We have said quite specifically that it will be ready at least four weeks before exit. On views expressed by stakeholders, the Treasury has engaged with a wide range of stakeholders, representing large international firms as well as smaller UK businesses.

The noble Lord, Lord Tunnicliffe, asked whether the SI makes policy changes. The UK is putting in place all necessary legislation via the EU withdrawal Act to ensure that there is a functioning legal regime in the event of a no-deal exit in March 2019. He asked whether the FCA will have adequate resources. I covered that point in response to the noble Baronesses, Lady Bowles and Lady Drake. He also asked about the temporary permissions regime that applies for a limited period and who would decide when it ends. The length of the temporary permissions regime is determined in accordance with the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, made on 6 November.

In a previous debate, the noble Lord, Lord Tunnicliffe, asked why the Treasury is solely responsible for the equivalence decisions, which relates to this debate. Across all financial services statutory instruments, the Commission’s functions are transferred to the Treasury. The transferral of equivalence powers is in keeping with this approach. Equivalence decisions are made by the issue of Treasury regulations. Regulations are issued by statutory instrument and subject to parliamentary scrutiny.

Again in a previous debate, the noble Baroness, Lady Bowles, asked whether the impact assessment is accurate given the cost to firms and how extensive MiFID is. The estimated costs of familiarisation have been calculated using the formula given at the end of the impact assessment and relate only to the cost of reading and understanding the instrument. Of course, affected firms will also need to familiarise themselves with a number of materials that are already published.

The noble Lord, Lord Tunnicliffe, asked a further question about whether temporary powers would water down MiFID II. The temporary powers are included to try to preserve outcomes for transparency. Without these flexibilities there would be a cliff-edge risk as to how the transparency regime operates. It would create uncertainty for firms and business, which we are trying to avoid.

With those responses, and the undertaking to study in detail the Official Report and to write on the specific questions raised, I beg to move.

Central Securities Depositories (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord, Lord Bates, for his introduction. As usual, I declare my registered interest as a director of the London Stock Exchange. By now we are familiar with the pattern of how powers transfer to the UK regulators and temporary regimes. I will not revisit that. I have just two points regarding these SIs that the Minister might be able to clarify.

I do not need a response to anything on the trade repositories regulations. I just note as new—new in the sense that I have not commented on it before—the way an ESMA-recognised UK trade repository or entity can simply move into the UK regime. That seems a sensible provision.

On the CSDs, the policy note and guidance on the Treasury’s website say that applications before exit will be “subject to existing law” while the application is considered. I wondered whether there could be some elaboration on the difference between that UK law and the onshored CSDR once firms switch to it. What happens at the point of switching, or is this just, as I suspect, splitting hairs and no big deal? That provoked my curiosity and, with other things going on, I did not quite have the energy to work through absolutely every last word and work it out for myself.

Two issues are general to all these SIs, particularly in the context of the no-Brexit—sorry, that is a Freudian slip—of the no-deal preparations, so I take this opportunity to raise them. Last week I showed a letter to the noble Lord, Lord Bates, when we expected to discuss the SIs that are to come later. It was sent to the chair of the Secondary Legislation Scrutiny Committee, explaining that the SIs laid under the EU withdrawal Act will be deferred, amended or revoked by the withdrawal agreement Bill, ready for the end of an implementation period, rather than exit day. My first point is that it is dangerous to think of any of these SIs as just-in-case provisions. Obviously, much of this allocation of powers is a provision for any Brexit scenario, but it would be helpful to know which provisions are likely to be revoked or substantially modified if we go into an implementation phrase. I am not sure we can necessarily do that for these at this point, but it would be useful if it was in the Explanatory Memorandums.

The other point that we have not previously discussed is that since Monday last week we have had the impact assessment. It did not reveal a great deal—there was no new or useful information—but I do not have a clue where the figures of the costs for firms to familiarise themselves with regulations come from. The amounts seem very small indeed. I wonder whether they include the thousands of pages of consultation that the FCA is doing, which is up to about 1,800 pages just on Brexit preparation. For MiFID, one of the largest regulations and which we will deal with later, the familiarisation cost is a mere £1,900. That is a very low charging rate. I cannot see anybody getting much legal advice for that; at London rates that is about two hours. Just for comparison, how long does it take the Treasury to make a complete transcription? It obligingly sent us the MiFID schedules, along with caveats about accuracy. The problem is that the firms that have to familiarise themselves with these new regulations cannot put in caveats about accuracy. Their compliance executives work under the rigours of a senior managers’ regime. There are no short cuts. I do not mean to cast any aspersions on the hard work being done by anybody in the Treasury—I know that a lot of diligent work is going on—but I do not see how these rather minimal costs can be justified.

[Lord Tunnicliffe (Lab)]

My Lords, I will take the statutory instruments in order, starting with the central securities depositories regulations. A characteristic of these SIs is that they tend to have two parts. I wish I had the same interests to declare as the noble Baroness because then I would come to this knowing something about it. Starting from scratch is quite a battle. My analysis of these SIs is broadly that there is a bit about the transfer of functions and a bit about the transitional provisions. They are more or less in those two groups. The transfer of functions is unexceptionable, except that I am not at all convinced that the Treasury should be solely responsible for the equivalence decision. That is a view that I shall take all the way through. The noble Lord does not have to answer me on this SI because I will bring it up on the last one, by which time a note might have arrived from the Box.

The transitional provision is more complex in all the SIs, but in particular with this one. When you dig into it you discover that apparently there is only one UK CSD and its transition will be little more than a formality, which is good to hear, since these organisations are so important in our lives. Non-UK CSDs have a more complex transition process, but, as far as I understood it, that was okay.

Similarly, the transfer of functions for the trade repositories is straightforward, except for my caveat on the Treasury’s role. I understand that there are five UK trade repositories, covered by paragraph 7.18 of the Explanatory Memorandum. Once again, it looks as though that is pretty well a formality. I found the non-UK TRs transfer regime more complicated, but the one feature I saw is that some new TRs—if they ever emerge—seem not to be fully registered for up to three years. Can the Minister explain why such a long period is necessary?

[Lord Bates]

I thank the noble Lord and the noble Baroness for their scrutiny of the statutory instruments. I will respond first to the noble Baroness, Lady Bowles, who asked about the difference between the current system and the onshoring SI. Before the CSDR, the recognised clearing house regime under the FSMA applies. After exit and the end of the transition regime, the onshored CSDR regime, which is more extensive, applies for any CSD.

The noble Baroness asked for more detail on how that process will work. The Bank of England sent a letter to non-UK CSDs, setting out the process through which CSDs may notify the Bank of England to enter a transitional regime following the UK’s withdrawal from the EU. The process is proportionate and straightforward, with questions we do not expect to be onerous for CSDs to answer. Non-UK CSDs are encouraged to indicate to the Bank of England their intention to notify from the point at which they receive the letter—so the letters have been sent. The Bank of England will treat these indications as notifications at the point that the legislation is made. We are therefore confident that non-UK CSDs will be able to make these notifications in good time. One specific element is that a non-UK CSD will continue to be subject to the existing requirements under the FSMA until the Treasury has made a decision on jurisdiction. Once that happens, these CSDs will be required to provide an application to the Bank of England six months after the Treasury decision. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit.

The noble Baroness asked about the familiarisation costs included in the regulations. I was looking at the algorithm in Annexe 5 and she made some points about that. I am happy to confirm that the familiarisation costs in the impact assessment cover only these instruments. They do not include FCA consultations or the broader impact of leaving the EU—just the specific provisions in this SI.

--- Later in debate ---

[Lord Bates]

I certainly would not suggest that the noble Baroness has misunderstood anything. I will work my way through the pile: I have a feeling that I will have an answer for her very shortly.

She asked what would be amended if there were an implementation period. The legislation would not come into effect in March 2019 in the event of an implementation period. It would be amended to reflect the eventual deal on the future relationship, or to deal with a no-deal scenario at the end of the implementation period. Amendment would depend on agreement being reached with the EU.

The noble Lord, Lord Tunnicliffe, asked if was appropriate that the Treasury is the only body responsible for equivalence decisions. The Treasury takes the role of the Commission in equivalence decisions, but will be informed by advice from the FCA as necessary. As to why the regime will last for three years, the TRRs provide sufficient time for the FCA to be satisfied that the new TR fully meets the requirements set out in the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories SI, of which he and I have fond memories and which was published on 22 October. Three years was judged the most suitable duration period, based on consultation with the FCA. The timescale aligns with other temporary regimes such as the CCP temporary recognition regime.

The noble Lord, Lord Tunnicliffe, asked specifically about the transitional regime for central securities, and the noble Baroness, Lady Bowles, also referred to it. The transitional period is intended to allow non-UK CSDs to continue to provide services in the UK after exit. UK CSDs that have applied for authorisation prior to exit day will be automatically entered into the transitional regime. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit. Any non-UK CSD that fails to notify the Bank may be subject to public censure. A non-UK CSD that has notified the Bank and entered the transitional regime can continue to provide CSD services in the UK on the current basis for a certain period. For a CSD that has made an application for recognition to the Bank of England, that period ends when the application is decided. For a CSD in a jurisdiction that the Treasury has determined to be equivalent and that has not made an application to the Bank of England, that period extends to six months after the Treasury’s equivalence determination. I think that is a partial answer to the question raised by the noble Baroness, Lady Bowles.

The noble Lord, Lord Tunnicliffe, also asked why the Government are not bringing into UK law the settlement discipline regime. Certain CSDR provisions on settlement discipline do not come into force until after exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the European Union (Withdrawal) Act 2018. Returning to the question asked by the noble Baroness, Lady Bowles, she said that it seems strange that once a country has been found equivalent, more is required of that CSD. Equivalence is a decision on the alignment of another country’s regulatory regime. This is a decision of the Treasury. The recognition of a specific CSD is a more technical decision at the level of that CSD, and that is made by the Bank of England.

[Lord Tunnicliffe]

Before the noble Lord sits down, I am fascinated to know what “public censure” looks like.

[Lord Bates]

Of course, that would be what the regulators engage in in the rigorous upholding of the rules that govern activities in their respective areas, whether it is the Bank of England, the Financial Conduct Authority or the Prudential Regulatory Authority. Any reprimand of any shortcoming they observe would be regarded as a matter of public censure.

I am grateful to noble Lords for their comments. I commend both these SIs to the House.

Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, first, I again thank the noble Lord, Lord Bates, for his introduction; it makes a change not to be the expert in the room. I greatly welcome this legislation and have just a few points to make, some of which follow up on those made by the noble Baroness, Lady Drake.

As I understand it, much of the problem with cold calling is that the cold callers—in this case, the introducers—are offshore. We will not be able to get at those generators of leads and they will attempt to sell on their information, which at the moment they may do quite successfully. The UK buyer of those leads would then presumably be committing an offence by following them up with a cold call, on the assumption that the person buying the information is not already, for example, the financial adviser to the individual concerned. Those following up, having bought that information in this hypothetical case, would be subject to the penalty. They should therefore be too scared to do it, so nobody buys leads and offshore cold calling stops because they cannot sell their ill-gotten gains. I think that is how it is meant to work, but it would be good to hear that confirmed.

We still have to address the wider issues of cold calling, beyond protecting pensions. I hope that, having dealt with this issue, we will not think that it is “job done” and that is the end of it. Following the noble Baroness, Lady Drake, I shall look at some of the issues that were not dealt with after the consultation period. The first was the time limit for having given consent. If the case in question happened 20 years ago, it rests on whether a person would reasonably expect to be contacted. It is probably quite a sophisticated system if the caller has information about the person because they already have a policy, for example. It all sounds very formal, and they go through some kind of identity check. I understand that the reason for not doing anything was the fear of setting a wider precedent within the GDPR, but that is a common excuse that is used more widely.

There may be more that could be done in due course because there is also consent by inertia, which was mentioned by the noble Baroness, Lady Drake. Perhaps after a time lapse, instead of saying that someone is not allowed to make the call, there could be a halfway house of having to make sure that the person still consents to receiving calls, especially if they are on a related product rather than the product they have already been advised on. The existing client relationship could become very stretched, especially where one firm is taken over by another which has a wider suite of products on offer. A client might expect a much narrower relationship than would come from an enlarged entity. I am not sure that the recipient of a cold call stating that the caller is the successor of Bloggs and Co would know that the call should not perhaps have been made.

Ultimately, we may have to look at more than just pensions. If we are successful, that lucrative strand for the scammers and the cheaters will be closed off, but individuals who have diligently put money into ISAs—especially if they have put it into stocks and shares ISAs over the period since ISAs started—can have as much saved in them as they might have in a pension fund. So when these organisations start looking for where else they can swindle people, those might be next on their list.

I urge that we do not think that this is “job done”. This instrument is excellent as far as it goes, but it is a work in progress and we have to continue to keep an eye out for where the scams move to.

[Lord Tunnicliffe (Lab)]

My Lords, subject to a satisfactory response from the Minister to the queries by the two noble Baronesses, I warmly welcome these regulations. I am sure many people will value the fact that cold calling is reduced, particularly in this important area.

Short Selling (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the noble Lord, Lord Bates, for his introduction and once again declare my interest in the register as a director of the London Stock Exchange plc.

It is fair to say that when this legislation was negotiated, a lot of it was directed against the markets in London, so if anyone is worried that the regime will run without so many requirements for consultation, it should not be the UK. I had the advantage of participating in scrutiny on Sub-Committee A of the Secondary Legislation Committee, on which I sit. As the Minister explained, in consequence, there has been an extension to the Explanatory Memorandum, and I thank him for that. The correspondence about that is in Appendix 2 to the report. As he said, it mainly concerns the use of sovereign credit default swaps for hedging purposes. That is the single issue to which I shall return.

By way of background, sovereign credit default swaps and their short selling was a highly contentious issue at the time of the eurozone sovereign debt crisis, with many wanting to ban sovereign CDSs altogether, blaming them for escalation to the crisis. It took several months of my life turning that around to establish that there was such a thing as legitimate hedging of correlated assets. Due to that sensitivity, it is worth more clearly explaining that in consequence of changes made in the regulation, there is a widening of the scope of the assets that sterling CDSs could be used to hedge—which, again, the Minister explained— which happens by removing the EEA reference and replacing it with a global one. I do not object to that widening—there was a choice between narrowing or widening, and widening probably goes with the open approach of the UK—but it means wider possible use of sterling credit default swaps. I want to ensure that that is properly understood, should anyone ever read this debate.

It would also be worth knowing what, if any, assessment of the additional volume that is expected to create, if any such calculation has been done, especially in the event of a no-deal Brexit, when some more chaotic things may be happening of the variety that was of concern during the eurozone sovereign debt crisis. I am still confused why Articles 8.4, 8.5 and 8.6 of the delegated act regulation have been deleted. Deleting those paragraphs removes the requirement for a Pearson correlation coefficient of 80% as part of the high correlation definition under Article 3.7(b) of the short selling regulation. The 70% threshold is retained under Article 3.7(c), within Article 18 of the delegated Act. Article 18 was cited in correspondence with the sub-committee as what the Treasury will follow when it takes over setting the correlation conditions.

I do not object to the Treasury taking over setting correlation conditions, because I think it has a good interest in what happens to hedging using sterling CDSs. I just want to know whether 80% is out of favour, whether something happened to replace it prior to the regulation, or whether that change is another widening.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this statutory instrument. I thank him, first, for forcing me to understand a little about short selling; it took several hours to get a reasonable knowledge of it. What I found most difficult were the various exemptions. I sought help from the department to try to understand them. It was pointed out to me that, in some ways, that was the wrong question. The key essence of much of what we are doing tonight is in Section 8 of the European Union (Withdrawal) Act. I remember the debates on that provision with great care, and the overwhelming requirement of Section 8 is that it should not be used to change policy, except as required for the smooth transition.